Plan of Reorganization, Disclosure Statement, and Confirmation

The plan-confirmation process is the procedural engine of Chapter 11. Knowing the sequence, the class-voting math, and the cramdown standards lets a candidate handle any plan-related question on the exam.

What Is the Plan Process Sequence?

A typical plan confirmation runs through eight steps:

1. Plan drafted by the debtor (the debtor has the exclusive right to file a plan for the first 120 days, extendable up to 18 months)
2. Disclosure statement prepared and filed alongside the plan
3. Disclosure statement hearing: court approves the disclosure statement after finding it provides "adequate information" for a hypothetical reasonable investor
4. Solicitation: approved disclosure statement, plan, and ballots distributed to impaired classes
5. Voting by impaired classes (within the deadline the court sets in the disclosure-statement order)
6. Confirmation hearing: court evaluates the plan against confirmation standards
7. Effective date: typically conditions to effectiveness must be satisfied (regulatory approvals, exit financing, etc.)
8. Plan consummation and distributions: cash, new securities, and other consideration distributed to creditors and (sometimes) equity holders

Exam Tip: Gotchas

• Disclosure statement approval is SEPARATE from plan confirmation. The court approves the disclosure statement first (finding "adequate information"), THEN votes are solicited, THEN the court holds a separate confirmation hearing. Skipping or combining these steps is an exam misdirection.
• Exclusivity is a debtor advantage. During the exclusivity period (initial 120 days, extendable to 18 months), only the debtor can file a plan. After exclusivity ends, any party in interest can propose a competing plan.

What Must the Court Find for Consensual Confirmation?

For a fully consensual plan (every impaired class accepts), the court must find that:

• The plan complies with applicable bankruptcy law
• The plan was proposed in good faith
• Administrative expenses will be paid in full on the effective date
• At least one impaired class has accepted the plan, excluding insider votes
• Best interests of creditors test is satisfied: each holder in an impaired class either accepts or receives at least as much as in a Chapter 7 liquidation
• The plan is feasible (not likely to be followed by liquidation or further reorganization)
• All impaired classes have accepted, OR cramdown standards are satisfied

The "best interests" test is the floor: no creditor can do worse under the plan than it would do in a hypothetical Chapter 7 liquidation. The feasibility test polices whether the reorganized company can actually meet its post-emergence obligations.

Exam Tip: Gotchas

• Best interests is a HOLDER-by-HOLDER test, not a class test. An impaired class can accept on a majority basis, but every individual holder in that class must still receive at least Chapter 7 liquidation value.
• Feasibility looks at the reorganized capital structure. A plan that leaves the reorganized company with debt service the projections cannot support will fail feasibility.

How Does Class Voting Work?

A class accepts the plan if both of the following are true for holders actually voting:

• At least two-thirds (2/3) in AMOUNT of allowed claims
• More than one-half (1/2) in NUMBER of allowed claims

Both prongs must be cleared.

For equity classes, acceptance requires at least two-thirds in amount of allowed interests actually voting (no separate "number" prong).

Important automatic-treatment rules:

• Unimpaired classes are deemed to accept (no actual vote)
• Classes receiving nothing under the plan are deemed to reject (no actual vote)
• Acceptance by an impaired class binds all members of the class

Exam Tip: Gotchas

• Class voting threshold is AT LEAST 2/3 in AMOUNT AND MORE THAN 1/2 in NUMBER. Both prongs must be cleared. A class with one large $100 million creditor voting yes and ten small $1 million creditors voting no would fail the "number" prong even though "amount" is satisfied.
• Only IMPAIRED classes vote. Unimpaired classes are deemed to accept; classes receiving nothing are deemed to reject. The debtor structures classification deliberately because deemed-acceptance and deemed-rejection both affect cramdown availability.

How Does Cramdown (Non-Consensual Confirmation) Work?

When at least one impaired class REJECTS the plan, the debtor can still confirm by satisfying the cramdown standards:

• At least one impaired NON-INSIDER class has accepted (the "impaired-class-acceptance" requirement)
• The plan does not discriminate unfairly against the dissenting class
• The plan is "fair and equitable" with respect to the dissenting class

The Absolute Priority Rule is built into the "fair and equitable" test: a junior class cannot retain or receive anything on account of its claim unless every senior dissenting class is paid in full.

Exam Tip: Gotchas

• Cramdown requires (i) impairment, (ii) at least one impaired non-insider class voting to accept, AND (iii) fair-and-equitable plus no-unfair-discrimination as to the dissenting class. All three must be satisfied; a plan with no impaired accepting class cannot be crammed down at all.
• Insider votes don't count for the impaired-class-acceptance prong. A creditor that is also an officer or director cannot single-handedly satisfy the rule by voting its insider claim.

What Are the Three Fair-and-Equitable Paths for a Rejecting Secured Class?

"Fair and equitable" has a specific statutory meaning for a dissenting secured class. The plan must give that class one of three treatments:

1. Lien retention with deferred cash payments: the class keeps its liens, and each holder receives deferred cash payments totaling at least the allowed amount of the claim
2. Sale of the collateral, with liens attaching to proceeds: the property is sold free and clear of the liens, and the liens attach to the sale proceeds instead
3. The indubitable equivalent: the holder receives something else the court finds is the practical equivalent of its claim (for example, a substitute lien of equal value)

For a rejecting unsecured class, fair and equitable instead requires either that the class be paid in full, or that no junior class receive or retain any property under the plan (the Absolute Priority Rule stated as a confirmation standard).

Exam Tip: Gotchas

• The three secured-class paths are alternatives, not a checklist. The plan needs to satisfy only one of the three; a plan can sell the collateral free and clear (path 2) without also retaining liens (path 1).
• "Indubitable equivalent" is a court-supervised catch-all, used when neither lien retention nor a proceeds sale fits the facts. It requires the court to find the substitute treatment is realistically as good as the original collateral.

What Makes a Class Impaired?

A class is unimpaired if the plan leaves the legal, equitable, and contractual rights of the holders unaltered. All other classes are impaired.

Practical consequences of impairment:

• Only impaired classes vote on the plan
• Unimpaired classes are deemed to accept
• Cramdown can be sought only against an IMPAIRED dissenting class
• Reinstatement (curing defaults and continuing the original obligation) often leaves a class unimpaired

Exam Tip: Gotchas

• A class can be "in the money" and still be impaired. Impairment is a rights question (any alteration), not a recovery question. A holder may be paid in full but receive payment in cash on a different timeline than the original contract and still be impaired.
• Reinstatement preserves unimpaired status. Curing pre-petition defaults and continuing the contract on original terms is the classic unimpaired treatment.

What Counts as "Adequate Information" in a Disclosure Statement?

The disclosure statement is the document that lets impaired creditors make an informed vote on the plan. The court approves it only after finding that it contains adequate information:

• Enough information about the debtor and the plan for a hypothetical reasonable investor of the relevant class to make an informed judgment
• The standard is flexible and case-specific; a more sophisticated creditor class typically needs less hand-holding than a retail-equity class
• A small-business or pre-packaged plan can sometimes proceed with combined disclosure-statement-and-confirmation hearings

Exam Tip: Gotchas

• "Adequate information" is the disclosure-statement standard, NOT a securities-law disclosure standard. It is calibrated to the class and the plan, not to a Form S-1 prospectus content list.
• Disclosure statement approval is a separate hearing from plan confirmation in a normal Chapter 11 case. Pre-packaged cases sometimes combine them, but the conceptual separation is the default.

What Should You Check on Exam Day?

• Can you state the class-voting math precisely: at least two-thirds in amount AND more than one-half in number of allowed claims actually voting, both prongs required?
• Do you know equity-class acceptance uses only the two-thirds-in-amount prong, with no separate number prong?
• Can you list the three cramdown requirements (at least one impaired non-insider class accepting, no unfair discrimination, fair and equitable) and explain why a plan with no impaired accepting class cannot be crammed down?
• Do you understand that impairment is a rights question, not a recovery question, so a class can be paid in full and still be impaired?
• Can you distinguish the disclosure-statement "adequate information" standard from a securities-law disclosure standard, and confirm it is reviewed at a hearing separate from confirmation?